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Chapter 1

INCOME TAX LAW IN PAKISTAN

. Since ancient· times, governments have been collecting revenues from

. their population- in different forms. .It was' necessary in order to meet the
different expenditures which the governments had to .incur. The nature and
.the extent of expenditures incurred by the governments have undergone a lot
of changes in the modern world. New. sources of collecting' the' necessary
amounts have also been found. Now a state has to spend a lot of money on its
defence requirements. Development expenditures and expenditures on general.
public services. (schools. hospitals. etc.) have also been increased manifold.
New. sources of receiving the necessary amounts have also emerged. For
. example. now a country can receive some resources from another· country, or·
an international organization either as loans or as aids.. However, collecting
the amounts from .its own population still remains as a major and popular .
source. Unfortunately ·in Pakistan yield from taxes has remained very small, .
thus increasing the 'burden of foreign loans. The present government is trying
to receive the due share of taxes from out own population. We hope that the
'people will come forward to pay their-proper share of taxes for the welfare of
the country .. Every, country tries to. develop its 'internal resources, because
different types of problems' are associated with the amounts received from
external sources. A government. tries' to 'generate internal revenue from
. different sources. The stability of any state and its economic structure is
'strongly correlated with the shape and framework of its taxation system ..
. In our country also,' like all, other countries of. the world, the
.government receives different types of taxesin order to finance its day-to-day ..
expenses, defence requirements and development." projects. These taxes
include Customs and Excise Duties, Income. Tax, Sales Tax, etc . .The
government lias recently introduced the 'Zakat' .and 'Ushr' system, the
income from which is spent only according to the Quranic injunctions.
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. The Federal Board of Revenue is the highest administrative authority of.
the Federal Government for the purpose of tax collection in the country. It
controls the whole working of tax machinery and matters regarding
".1 employees' of tax department in the ·country. The Federal Government
appoints the members and the Chairman of the Federal Board of Revenue .:

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 " 1 INCOMETAX .. ,

The income.tax and sales tax are administered by the Board through '.
Chief Commissioners of Inland Revenue. They are assisted by the
Commissioners Inland Revenue, Additional Commissioners Inland Revenue,
Deputy Commissioners Inland Revenue, Assistant Commissioners Inland
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Revenue, Officers of Inland Revenue and Inspectors Inland Revenue .. The
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Deputy Commissioners Inland Revenue' are responsible for ascertaining the
amounts due from the taxpayers in the areas assigned to them. .
Responsibility for administering the Customs and Excise' duties has
been assigned by the Board to the Collectors of Customs and Central Excise.
The Assistant Collectors arid Superintendents assist the Collectors. There are
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separate administrative organizations for land customs and sea customs. .

INCOME TAX ORDINANCE, 1979 .:

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The Income Tax Ordinance, )979, was. promulgated through the
Finance Ordinance .on June 28,.1979 and came into force on the pt of July of
the same year. It adopted all the basic concepts of the repealed Income Tax' I
Act, J 922, so that the benefit of the whole case Iaw built up over the last 57
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years is not rendered useless ..
This law continued "to prevail in the country for 22 years. Under ·this
law an Income Tax Survey was conducted in 1999-2000. Moreover, the.
government issued many tax amnesty schemes" the last one in year 2000
yielded a revenue of Rs.. J 2 billion. However, government felt that after 22
years of service, the law is not fulfilling the requirements of a modern
taxation system. Thus, the governmentformed a Commission and on the basis
of its recommendations a new Income Tax Ordinance was promulgated with
.. effect from 15t July 2002. '. . , I

This Ordinance has been drafted. with the following objects:

I. To re-arrange the provisions in a more systematic and logical
form;
2. . To simplify the law so as to make it easily understandable by the
taxpayers;
3. To plug loop-holes, remove lacunae and ambiguities;
4. To rationalize and amplify the existing provisions and to
introduce new ones, where necessary, in the light of the decisions
~. of the superior courts; .
5. To eliminate, as far as possible, tax evasion;

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, To evolve a fair and equitable, tax system' which is capable 'of
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voluntary compliance and effective administration; and t

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7. To introduce a, system of assessment designed to create an r,

atmosphere of mutual trust and confidence between the taxpayers

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and the tax officials.
.8. .Ahother tax amnesty scheme for declaring domestic as well as
" foreign assets was introduced in June 2019. Persons having,
J undeclared income, ,immovable property etc 'can whiten their
assets by paying tax at the rate of 1.5'% to 6 % depending on the'
category of asset declared. Last date for, declaration was
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03.07.2019. ',:
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HISTORY OF INCOME TAX LAW .,

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In Undivided India (now consisting ,of Pakistan, ,Bangladesh and India)

income tax was introduced \ for the first time in the year 1860., It was
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introduced by Income Tax Act, 1860, and exactly the same 'pattern was
followed that was prevailing in those days in the United Kingdom. This' Act •
came' into force on 31st July 1860 and continued for only 5 years up to 1st
-: , August 1865 when 'it was completely withdrawn. A major characteristic 'of
this Act was that the agricultural income from land.iabove the rentalvalue of,
Rs. 600 per annum, was taxable. " \ '
I , ,"Income Tax was not applicable for the next two years. 'However, it was
!' : re-imposed with. certain changes in 1867 and was called: "The Licence Tax
Act of 1867". Inconie earned up,to Rs. 200 per annumwas not taxable under,
this law. Amounts earned above this limit were taxable at the rate of 2 per
cent. In this Act; agricultural .income was exempted from tax. In 1868" its
name was changed to "The Certificate Act, 1868". By virtue of this Act, riot
only that the exemption limit was raised to Rs. 500.. but' the rate 'of tax was
also reduced to 1.6 percent. In ,1869, the Certificate Act was converted 'again
into Income Tax Act II. Under this law, agricultural income was again
" brought under taxation. Moreover, different rates of tax were proposed on
different types of income. This Act remained in force for only one year and
during the next four years, tax was levied by annual legislation. By 1872, the
exemption limit was gradually raised to Rs. 1,000. Income tax was entirely
withdrawn for the second time in 1873; ,
After 'a gap of four years, it was' re-imposed and termed as "The
Licence Act; 1877". In this law, a 'tax on trade .and a. cess on land was
 -I . INCOME TAX
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proposed. This Act continued up to 1886,.although quite a few changes in the

working of the Act were made during this period. .
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A new Income Tax Act which came into force in 1886,.is.treated as an
important landmark in the taxation history of the country. It is due to the fact I
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that it not only continued for a' long period of time, as compared to its
predecessors, but great. improvements in the legislation were _also made.' A
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proper definition of agricultural income was provided for the first time and
such income was completely exempted from tax. Concession in payment of
tax was provided if a person paid life insurance premium. (This was done in
order to encourage the people to save money and invest it properly. This
concession still continues.) Schedule explaining the sources of income and
rates of tax was for the first time attached to the Act separately. This schedule
continued for 30 years. Income TaX Act, 1886. itself continued up to 1918
and during its life of 32 years, only one major amendment was made in it in
the year 1903.
Another important landmark in the taxation history .of the subcontinent
came about in the year 1918. "The Income Tax' Act, ·1886" was replaced by
"The Income Tax Act, 1918": The new Act for the first time introduced a
distinction between "Total Income" and "Taxable Income". Drastic changes
were effected in the procedure for payment of tax. Under the previous Acts, .
income of the same year was taxed immediately, but in this Act, tax was
imposed in. respect of the income earned during the previous income year ..
Unfortunately, it was soon felt that this law had created quite a few
difficulties so far as its application was concerned. Day-to-day difficulties
made it essential that not only the improvements in the law must be made but
the administration of income tax 'must also be centralized. Due to the above
mentioned reasons, the question of amendments (changes) in the law was first
considered by the Provincial Committees and then an All India Committee
was formed in 1921. The purpose of th is comm ittee was to revise the whole
Jaw regarding income tax and on the report of this committee, the Act (XI of
1922) was introduced.
. Income Tax Act, 1922, prescribed a complete machinery and procedure
of assessment. However. it-provided that rates of tax will be fixed every year
. by the Finance Acts. Wide powers were given to the assessing officers under
this Act. Amendments •.in, the Act continued, meanwhile the Government, in
-. 193~. formed an e~ committee. The purpose of this committee was 'to .
investigate the law completely from all possible angles. The committee was
. asked to give a report about: .
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INCOME TAX LAw IN PAKISTAN _
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(a) Whether the tax burden imposed by the government is reasonable
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and justified.
(b) .Is. the income tax. administration working efficiently?
The Committee made a thorough investigation into all these matter-sand.
then submitted its report in 1936. It resulted in drastic changes in ·respect of
taxation and administration of the Act in 1939..The World War II (l 939-45)
necessitated a better system, so that tax can' immediately reach the
. government and in 1"944,· "Pay as You Earn" scheme was introduced. (This
. scheme which still continues in a
little different shape requires an early.
depositing of tax by certain persons.) In 1945, distinction between "Earned"
and "Unearned" income was made and some concession was provided on the
"Earned Income". I -, .
, After Independence from British rule on 14~ August 1947, the Pakistan
Government adopted the IncomeTax Act, 1922, as amended up to that date.
The provisions of the Act were extended to the Whole of Pakistan except the
special areas. . ~..... . . -
'. . A Taxation Inquiry Committee. was set' up in June .1958. On this'
Committee besidesofficials, representatives of trade and commerce were also
'. taken as members. The ,said committee 'submitted its report to the Central
Board of Revenue after long deliberatioris. Some of the recommendations of .
the committee were accepted by the governmentand Income Tax Act. 1922,
was amended accordingly. In 1959, Super Tax was abolished on income of all
persons' except registered firms and companies. The rates of each slab were··
. expressed as a percentage of income'. In )960, the financial year was changed
. to commence on l" July and end on ~Olh June: Previously, it used to start on
l." Apr.il and end on 3 pI March. In 1961, an Income Tax Committee was
formed by the CBR to make recommendations for simplifying the Income
Tax Act and procedures. In 1965 "Self Assessment Scheme" was introduced.
'The "Income Tax Act. 1922'.'continued 'for 57 years till 1979. During
this period.ia lot of amendments were made in the original Act. Between 1922
and 1979. as.many as 71 amendment acts were passed by the. legislature. Each
of these amendment Acts contained several' amendments. some of them being
of far.-reaching. importance. The purpose of most of ·these changes was to
check evasion of tax. Some of these changes were brought about in a hurry'
and the framework of the basic Act was not kept in mind. The result was that
the Act became a. complicated law and difficulties arose in' its day-to-day
'working. z, .

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6 INCOME TAX
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Keeping these difficulties in view, the government introduced -a new

income tax law namely "Income, Tax Ordinance, 1979". The Ordinance
replaced the Income Tax Act 192i and was enforced as from pt July 1979. I

The Self Assessment Scheme was further, broad-based in this Ordinance.

However. the job of improving the law continued after the promulgation of
this Ordinance also. In 1985, the government set up a National Tax Reforms
-Comrnission to suggest ways and means to improve the existing tax structure
in the country. As a result of all these efforts the Income Tax Ordinance,
2001, is in force in Pakistan now:
NATIONAL TAX REFORMS COMMISSION
It is worthwhile to mention here that in 1985, the government set up a
National Tax Reforms Commission to suggest ways and means to improve
the existing structure of taxation laws in the country. The -Comrnission
consisted of Members of Senate and National Assembly, high government
officials and renowned industrialists. Terms of Reference of the Commission
were as under:
J. To review and evaluate the existing tax structure to identify the'
needed areas of reforms from the point of view of resource
mobilization, economic and social equity and simplicity of law,
administration and procedures.
2. "To recommend 'a plan of action 'for expandingthe domestic base
of taxation and for ensuring that tax revenues grow faster than the
,growth in nominal Gross Domestic Product.
3. To recommend restructuring of the existing taxes with the object
of distributing the burden of tax according to capacity to pay,
providing appropriate protection to 'domestic industry and,
encouraging saving and investment in the economy.
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4. To propose a' new integrated tax system in the light of the above
stated principles" with a judicious balance between direct and
indirect taxes and with particular attention to comprehensive tariff "
reforms, taxation on luxury consumption, agriculture taxation and
user charge for public service.
5. To suggest ways and means to improve the tax administration
with the specific objective of eliminating leakage in tax revenues
and providing relief to the genuine tax pa~er.,
6. To 'make feasible suggestions for improving provincial and local
taxes.
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INCOME TAX LAw IN,PAKISTAN 7

7. To review any other issue which may be referred to the

Commission by the Federal Finance and Planning Minister.
The Commission has submitted its report and recommendations . 'Most
, :of these have been incorporated in Income Tax ordinance 2001.
INCOME TAX ORDINANCE, 2001 " ,. , ,
Another Commission' constituted by the government - submitted its
report in May 2001. The Commission suggested that Income Tax Ordinance,
1979, should be replaced by IncomeTax Ordinance, 2001, which is claimed
to be simple and less complicated. This' new Income Tax Ordinance was
prom uIgated on 13th September 2001 and it has become effective from pI,
July 2002. Before promulgation necessary changes -have 'been made through
Finance Ordinance, 2002~ The assessments of tax' year 2003, onwards are
finalized under Income Tax Ordinance, 2001, 'so this book is completely"
based on the new Ordinance. The Central Board of Revenue has claimed that
the 'new Ordinance is a justifiable, pragmatic, easy to understand and in I
accordance with the global environments.
;,The government claims that by introduction of this .Ordinance truly,
revolutionary changes have been brought in the income tax law and these,
changes are aimed at simplifying its application and enabling taxpayers to
'comply with its provisions.
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The new law has abolished the role of "assessing officer" who used to
determine the 'income of taxpayer and compute his tax 'liabilicy.. These"
responsibilities have now been entrusted to taxpayer himself." '" ' «,«:
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:)' It, has also been claimed that' under the, new Ordinance the .self
, assessment procedure will be more meaningful, and-many conditions which
were necessary for such an assessment have been, withdrawn. It will be '
universal in the true sense of the word, as all 'classes of taxpayers, w.ithout any
exception will be entitled to the use of the scheme. The new concept is a
removal of one of the most pervasive distortion of income tax system. This
, change is likely to bring modernity and progress in the system.,
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The' government is also hopeful that the new law will obtain uniformity
of tax rates and tax treatment, encourage voluntary compliance and ensure an
effective d}spute resolution. " ,
In spite of all these claims it has been observed that the new Ordinance
will need lot, of changes 'and additions to become a workable law in our
society. Actually a lot of changes have already been made through Finance
Order, 2002, as well as' subsequent Finance' Acts. With these, hopes and
 8 INCOME TAX

observations the "Income Tax Ordinance. 200 I" has been enforced' and all
income tax returns for income earned from. I st July 2002 onward are being
taxed under this law'.

TAX ADMINISTRATION REFORMS PROGRAMME

The Government of Pakistan has started a Tax Admiriistration Reforms
Programme with the help of International Monetary Fund, The basic
objectives of the programme are to bring cultural, operational and structural
changes in the taxation system. The Central Board of Revenue has planned to
replace the existing divisional structure of income tax with a. functional h
.. structure. Three Large Taxpayers Units' have been established at Karachi,
. Lahore and Islamabad. In the big cities Medium Taxpayers Units have also
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been established.' Ultimately it is' planned that all Medium Taxpayers 'Units I
will be converted into.Regional Tax Offices. In total fourteen Regional Tax· "j
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Offices will be established which will be responsible for collection ofall • j
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domestic taxes, i.e. income tax, sales tax and excise. Under this programme,
twenty-three' Taxpayers Facilitation Centers have been. opened whereas \
twenty-nine more such Centers are planned to be started. The Programme is
expected to be completed by 2009. It will be only then that an assessment of .
the achievements of the programme will be possible. .
In order to properly implement the Tax Administration Reforms
Programme the Central Board of Revenue is being transformed into Federal
Board of Revenue (FBR). The Federal Board of Revenue Act, 2007, has
empowered the tax officials to formulate policy for performance management
awards. incentive packages, golden handshake scheme and' integrated
management policy for the tax machinery. It will also provide powers to
implement a complete human resource policy, power to assess, identify,
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create. decrease and reduce or designate various posts. The FBR Act
empowers the. Board to make rules for maintaining discipline in the
organization. It also ensures complete autonomy of the Board to run its day to
.day affairs in an efficient' manner. The implementation process of the FBR
Act, 2007. has been completed.
Income Tax Authorities expect' that through this Implementation the tax
base will be broadened and the tax collection in the country will be enhanced.
TiU- Reforms Commission .
~ The federal minster for finance constituted a Tax Reforms commission in
September 2014 ..
The terms of reference of the commission wasdescribed as follows:
I.
. Review and rationalization of direct and indirect taxes,

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INCOMETAX LAw IN PAKISTAN 9

II. Customs tariff rationalization; .

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, III. Review of Autonomy and' Administrative structure' of Federal

Board of Revenue,
IV. Creation of border force to deal with illegal movement of'
persons and, goods across international borders, and
v. ,Any other related, issues. :'
The commission has presented its report and many recommendations of the
commission have been included in the Finance Act, 2015 and 2016.
BROADENING 'OF TAX BASE C'OMMlrTEE
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This committee was also constituted by the Eederal Minster for Finance in
MaY20IS. .
Tile objectives of tile Committee are:
,I Review and rationalization of direct and indirect taxes with a
view to.broadening the net.
II. To recommend and discuss new tax measures.
III. To provide input' on different tax policy issues 'enabling the'
Government to adopt a pluralistic view representing divergent
interest group. This is to be completed so as to' enhance tax
, revenues."
IV. To deliberate 'up,on and suggest measures. for extending tax~net, '
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v. ' " To 'propose legislation which would minimize opposition and
" increase compliance to law. ' -
VI. Assist in any .other task assigned by the Finance Minister. This "
committee continued its deliberations to extendthe tax base in
the country by improving the existing 'tax laws. This committee>
has also submitted its report and, its recommendations are being
gradually implemented. " ' '
SC'OPE 'OF INC'OME TAX LAWS
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We shall discuss the scope of Income Tax Law from two different
'angles:
I. The territorial.limits to which the Income Tax Ordinance applies:'
2. ':The components of Income Tax Law in our country. '

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1. Extent of Income Tax Ordinance, .2001

The Income Tax Ordinance, 2001, applies to the wholeof Pakistan. The
definition of word "Pakistan" has been provided in Article I(2) of the ,
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Constitution of Pakistan 1973. The following territories have .been included . i
therein: .. '. , ,
(a) Provinces of Balochistan, 'Khyber Pakhtoonkhwa, Punjab and
Sind. "
(b) , Federal Capital.
(c) Tribal Areas which have now been included in Pakistan. "
(d) States and territories as may be included in Pakistan, whether by'
accession or otherwise. '. ., ',
2. Components of Income Tax Law
The following are the constituents of Income Tax Law in Pakistan:' ,
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(a), Income Tax Ordinance, 2001 (as amended) ,
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(b) Rules framed by the Board 'j
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(cl' Notifications, Circulars and Orders
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(d) Income Tax Case Law
(e) Finance Acts or Ordinances
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(a) Income Tax Ordinance, 2001 (as Amended) , 7

It is the basic constituent of income tax lawin our country. On its basis, , (:
the whole taxation structure of the country is founded. The whole procedure
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of taxation including matters 'regarding payment of tax, collection of tax" "
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penalties, assessment, refund" appeals etc. has been provided in the
Ordinance. It consists' of thirteen chapters. Each chapter deals' with a
particular subject and has been divided into parts. Many parts are further
subdivided into divisions. There are 242 sections of the new Ordinance .as
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compared to 167 sections of Income Tax Ordinance, '1979 (repealed). The
Ordinance also contains fourteen schedules. Schedules are also treated as part
of the Ordinance. The changes in the Income Tax Ordinance, 2001, aredone ..
by the Finance Ordinance or Finance Act every year. Such changes are of a
permanent nature.
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(b) 'Income Tax Rules ./ ,I
The, Federal Board of Revenue, which. is the highest income tax
executive authority in Pakistan, makes' rules from time to time which are

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 INCOME TAX LAw IN PAKISTAN . . 11.

meant for the guidance of its officers as well as the tax payers. The Federal
Board of Revenue has been' assigned this power .under section 237 of the
"Income Tax Ordinance, 2001". These' rules are notified in the official
gazette. Such rules have the .same force as the sections in Income' Tax
Ordin~nc~ itself and are.implemente~ in the same manner ....
.Since 1924,. CBR has framed a number of rules: regarding rates of
depreciation, registration of firms, submission. of returns, forms of appeals,
etc. which .are treated as a part of income tax law. The latest rules "Income.
Tax Rules.. 2002" have been issued to meet the requirements of Finance
Ordinance, 2001. During 2007, Federal Board of Revenue has replacedCBR
and is performing all its functions. :' _.' _
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(c)' Notifications, Circulars and Orders /

The Federal Government is authorized under section 53 of Income Tax

Ord inance, 2001, to exempt any class of income or the income of any class of
,persqns, in whole or in part, or reduce the rates of tax, or make any other'
modifications in respect of income tax. The Federal Government must place'
-all amendments made by it in a financial year before the National Assembly.
The Federal Board of Revenue also issues circulars and orders for the
guidance of its officials. Any' such circular issued by the Board is binding on
all Income Tax Authorities and other persons employed in the execution of
the Ordinance. Such circulars: are not binding on taxpayers. These
'notifications, circulars and orders are the third component of income .tax in
the country. Now these are being issued by the Federal Board of Revenue.
(d) Income ·Tax Case Law'
In the interpretation of tax laws, the possibility of different types of
disputes is evident. When such a dispute arises, the aggrieved party presents.
its case to a court of law, which decides the case and provides correct
interpretation of the law. Such decisions of the courts are known as Income
Tax case law and reference to such decisions is subsequently made in order to.
get necessary guidance. Thousands of cases, regarding the interpretation of
tax laws and the definitions of terms, used..in the Ordinance, have been
decided by the courts. These are also a very important component of income
tax law in Pakistan. ' .

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(e) Finance Acts or Ordinances ' '
In order to meet the budgetary requirements and' other social and
.economic needs of the country an annual law known as Finance Act or
Ordinance, is promulgated every year; It usually prescribes the maximum
income which is not liable to tax. Changes in the Income Tax Ordinance,
200 I, itself are also brought about through this legislation.' Rates of tax',.
applicable. for the next financial year are also specified. The principles of
taxation and computation of tax are also laid down by the Finance Act or
Ordinance. These changes are made in order to bring the law in line with the ..
changing economic environments of the country. The Finance Act or.
Ordinance 'contains provisions of general character which are· of permanent
operation and it forms part of the general law of taxation.

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